4

After studying this chapter,

you will be able to:
Elasticity
In 2013, coffee production soared and the price tum-
bled. Despite the increased production, coffee pro­
◆

ducers saw their revenue fall. How does the quantity

of coffee produced influence the price of coffee and
◆  Define, calculate, and explain the factors that
the revenue of coffee producers?
influence the price elasticity of demand
To answer this and similar questions, we use the
◆  Define, calculate, and explain the factors that
neat tool that you study in this chapter: elasticity.
influence the income elasticity of demand and the
At the end of the chapter, in Economics in the
cross elasticity of demand
News, we use the concept of elasticity to answer the
◆  Define, calculate, and explain the factors that
question about the market for coffee. But we begin
influence the elasticity of supply
by explaining elasticity in another familiar setting: the
market for pizza.

121

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 122 Chapter 4 Elasticity

To calculate the price elasticity of demand for pizza,

◆ Price Elasticity of Demand we need to know the quantity demanded of pizza at
You know that when supply decreases, the equilibrium two different prices, when all other influences on
price rises and the equilibrium quantity decreases. But buying plans remain the same.
does the price rise by a large amount and the quantity Figure 4.1 zooms in on a section of the demand
decrease by a little? Or does the price barely rise and curve for pizza and shows how the quantity
the quantity decrease by a large amount? demanded responds to a small change in price.
The answer depends on the responsiveness of the Initially, the price is $20.50 a pizza and 9 pizzas an
quantity demanded of a good to a change in its price. hour are demanded—the original point. The price
If the quantity demanded is not very responsive to a then falls to $19.50 a pizza, and the quantity
change in the price, the price rises a lot and the equi­ demanded increases to 11 pizzas an hour—the new
librium quantity doesn’t change much. If the quan­ point. When the price falls by $1 a pizza, the quan­
tity demanded is very responsive to a change in the tity demanded increases by 2 pizzas an hour.
price, the price barely rises and the equilibrium To calculate the price elasticity of demand, we
quantity changes a lot. ­express the change in price as a percentage of the aver-
You might think about the responsiveness of the age price and the change in the quantity demanded as a
quantity demanded of a good to a change in its price percentage of the average quantity. By using the average
in terms of the slope of the demand curve. If the price and average quantity, we calculate the elasticity at
demand curve is steep, the quantity demanded of the a point on the demand curve midway between the
good isn’t very responsive to a change in the price. If original point and the new point.
the demand curve is almost flat, the quantity The original price is $20.50 and the new price is
demanded is very responsive to a change in the price. $19.50, so the price change is $1 and the average price
But the slope of a demand curve depends on the is $20 a pizza. Call the percentage change in the price
units in which we measure the price and the quan­ %ΔP, then
tity—we can make the curve steep or almost flat just
by changing the units in which we measure the price ,ΔP = ΔP/Pave * 100 = (+1/+20) * 100 = 5,.
and the quantity. Also we often want to compare the
The original quantity demanded is 9 pizzas and
demand for different goods and services and quanti­
the new quantity demanded is 11 pizzas, so the quan­
ties of these goods are measured in unrelated units.
tity change is 2 pizzas and the average quantity
For example, a pizza producer might want to com­
demanded is 10 pizzas. Call the percentage change in
pare the demand for pizza with the demand for soft
the quantity demanded %ΔQ, then
drinks. Which quantity demanded is more respon-­
sive to a price change? This question can’t be ,ΔQ = ΔQ/Q ave * 100 = (2/10) * 100 = 20,.
­answered by comparing the slopes of two demand
curves. The units of measurement of pizza and soft The price elasticity of demand equals the percentage
drinks are unrelated. But the question can be change in the quantity demanded (20 percent)
answered with a measure of responsiveness that is divided by the percentage change in price (5 percent)
independent of units of measurement. Elasticity is and is 4. That is,
such a measure.
The price elasticity of demand is a units-free measure ,ΔQ
of the responsiveness of the quantity demanded of a Price elasticity of demand =
,ΔP
good to a change in its price when all other influ­
ences on buying plans remain the same. 20,
= = 4.
5,
Average Price and Quantity  Notice that we use the
Calculating Price Elasticity of Demand average price and average quantity. We do this
We calculate the price elasticity of demand by using because it gives the most precise measurement of
the formula: elasticity—at the midpoint between the original price
and the new price. If the price falls from $20.50 to
Percentage change $19.50, the $1 price change is 4.9 percent of $20.50.
Price elasticity of in quantity damanded The change in quantity of 2 pizzas is 22.2 percent
= .
demand Percentage change in price of 9 pizzas, the original quantity. So if we use these

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 Price Elasticity of Demand      123

Percentages and Proportions  Elasticity is the ratio of

Figure 4.1  Calculating the Elasticity two percentage changes, so when we divide one per­
of Demand centage change by another, the 100s cancel. A percent­
age change is a proportionate change multiplied by 100.
The proportionate change in price is ΔP/Pave, and the
Price (dollars per pizza)

Original
point proportionate change in quantity demanded is
20.50 ΔQ/Qave. So if we divide ΔQ/Qave by ΔP/Pave we get the
same answer as we get by using percentage changes.
= $1
A Units-Free Measure  Now that you’ve calculated a
Elasticity = 4
20.00 price elasticity of demand, you can see why it is a
Pave = $20 units-free measure. Elasticity is a units-free measure
New because the percentage change in each variable is
point
­independent of the units in which the variable is
19.50 ­measured. The ratio of the two percentages is a num­
D
ber without units.

Qave = 10
Minus Sign and Elasticity  When the price of a good
0 9 10 11
rises, the quantity demanded decreases. Because a posi-
Quantity (pizzas per hour) tive change in price brings a negative change in the
quantity demanded, the price elasticity of demand is
The elasticity of demand is calculated by using the a negative number. But it is the magnitude, or
formula:* ­absolute value, of the price elasticity of demand that
tells us how responsive the quantity demanded is. So
percentage change to compare price elasticities of demand, we use the
in quantity demanded magnitude of the elasticity and ignore the minus sign.
price elasticity of demand =
percentage change in price
,ΔQ
= Inelastic and Elastic Demand
,ΔP
If the quantity demanded remains constant when the
ΔQ/Qave
= price changes, then the price elasticity of demand is
ΔP/Pave zero and the good is said to have a perfectly inelastic
2/10 demand. One good that has a very low price elasticity
= = 4.
1/20 of demand (perhaps zero over some price range) is
­insulin. Insulin is of such importance to some diabet­
This calculation measures the elasticity at an average price of ics that if the price rises or falls, they do not change
$20 a pizza and an average quantity of 10 pizzas an hour. the quantity they buy.
* In the formula, the Greek letter delta (Δ) stands for “change in” and If the percentage change in the quantity demanded
%Δ stands for “percentage change in.” equals the percentage change in the price, then the
price elasticity equals 1 and the good is said to have a
MyEconLab Animation and Draw Graph unit elastic demand.
Between perfectly inelastic demand and unit elas­
numbers, the price elasticity of demand is 22.2 tic demand is a general case in which the percentage
divided by 4.9, which equals 4.5. But if the price change in the quantity demanded is less than the
rises from $19.50 to $20.50, the $1 price change is ­percentage change in the price. In this case, the price
5.1 percent of $19.50. The change in quantity of 2 elasticity of demand is between zero and 1 and the
pizzas is 18.2 percent of 11 pizzas, the original quan­ good is said to have an inelastic demand. Food and
tity. So if we use these numbers, the price elasticity of shelter are examples of goods with inelastic demand.
demand is 18.2 divided by 5.1, which equals 3.6. If the quantity demanded changes by an infinitely
By using percentages of the average price and aver- large percentage in response to a tiny price change,
age quantity, we get the same value for the elasticity then the price elasticity of demand is infinity and the
regardless of whether the price falls from $20.50 to good is said to have a perfectly elastic demand. An
$19.50 or rises from $19.50 to $20.50. example of a good that has a very high elasticity of

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 124 Chapter 4 Elasticity

demand (almost infinite) is a soft drink from two The Factors that Influence the
campus machines located side by side. If the two Elasticity of Demand
­machines offer the same soft drinks for the same
price, some people buy from one machine and some The elasticity of demand for a good depends on
from the other. But if one machine’s price is higher ■ The closeness of substitutes
than the other’s, by even a small amount, no one ■ The proportion of income spent on the good
buys from the machine with the higher price. Drinks ■ The time elapsed since the price change
from the two machines are perfect substitutes. The
demand for a good that has a perfect substitute is Closeness of Substitutes  The closer the substitutes for a
­perfectly elastic. good, the more elastic is the demand for it. Oil as fuel
Between unit elastic demand and perfectly elastic or raw material for chemicals has no close substitutes so
demand is another general case in which the percent- the demand for oil is inelastic. Plastics are close substi­
age change in the quantity demanded exceeds the per- tutes for metals, so the demand for metals is elastic.
centage change in price. In this case, the price elasticity The degree of substitutability depends on how
of demand is greater than 1 and the good is said to narrowly (or broadly) we define a good. For exam­
have an elastic demand. Automobiles and furniture are ple, a smartphone has no close substitutes, but an
examples of goods that have elastic demand. Apple iPhone is a close substitute for a Samsung
Figure 4.2 shows three demand curves that cover Galaxy. So the elasticity of demand for smartphones is
the entire range of possible elasticities of demand that lower than the elasticity of ­demand for an iPhone or
you’ve just reviewed. In Fig. 4.2(a), the quantity a Galaxy.
demanded is constant regardless of the price, so this In everyday language we call goods such as food
demand is perfectly inelastic. In Fig. 4.2(b), the per­ and shelter necessities and goods such as exotic vaca­
centage change in the quantity demanded equals the tions luxuries. A necessity has poor substitutes, so it
percentage change in price, so this demand is unit generally has an inelastic demand. A luxury usually
elastic. In Fig. 4.2(c), the price is constant regardless has many substitutes, one of which is not buying it.
of the quantity demanded, so this figure illustrates a So a luxury generally has an elastic demand.
perfectly elastic demand. Proportion of Income Spent on the Good Other
You now know the distinction between elastic and things remaining the same, the greater the proportion
inelastic demand. But what determines whether the of income spent on a good, the more elastic (or less
demand for a good is elastic or inelastic? inelastic) is the demand for it.

Figure 4.2  Inelastic and Elastic Demand

D1
Price

Price

Price

Elasticity = 0 Elasticity = 1 Elasticity =

12 12 12 D3

6 6 6
D2

0 Quantity 0 1 2 3 Quantity 0 Quantity

(a) Perfectly inelastic demand (b) Unit elastic demand (c) Perfectly elastic demand

Each demand illustrated here has a constant elasticity. The part (b) illustrates the demand for a good with a unit elastic­
demand curve in part (a) illustrates the demand for a good ity of demand. And the demand curve in part (c) illustrates
that has a zero elasticity of demand. The demand curve in the demand for a good with an infinite elasticity of demand.

MyEconLab Animation

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 Price Elasticity of Demand      125

Think about your own elasticity of demand for

chewing gum and housing. If the price of gum rises, Figure 4.3  Elasticity Along a Linear
you consume almost as much as before. Your demand Demand Curve
for gum is inelastic. If apartment rents rise, you look
for someone to share with. Your demand for housing

Price (dollars per pizza)

is not as inelastic as your demand for gum. Why the 25.00
Elasticity = 4
difference? Housing takes a big chunk of your
­budget, and gum takes little. You barely notice the
higher price of gum, while the higher rent puts your 20.00
Elastic
budget under severe strain.
15.00
Elasticity = 1
Time Elapsed Since Price Change  The longer the 12.50
time that has elapsed since a price change, the more 10.00
Inelastic
elastic is demand. When the price of oil increased by
400 percent during the 1970s, people barely changed Elasticity = 1/4
the quantity of oil and gasoline they bought. But 5.00
gradually, as more efficient auto and airplane engines
were developed, the quantity bought decreased. The
demand for oil became more elastic as more time 0 10 20 25 30 40 50
elapsed following the huge price hike. Quantity (pizzas per hour)

On a linear demand curve, demand is unit elastic at the

midpoint (elasticity is 1), elastic above the midpoint, and
Elasticity Along a Linear Demand Curve inelastic below the midpoint.
Elasticity of demand is not the same as slope. And a
good way to see this fact is by studying a demand MyEconLab Animation and Draw Graph
curve that has a constant slope but a varying elasticity.
The demand curve in Fig. 4.3 is linear, which
means that it has a constant slope. Along this demand the average quantity is 10 pizzas. Putting these num­
curve, a $5 rise in the price brings a decrease of 10 piz­ bers into the elasticity formula:
zas an hour.
But the price elasticity of demand is not constant ΔQ/Q ave
Price elasticity of demand =
along this demand curve. To see why, let’s calculate ΔP/Pave
some elasticities.
20/10
At the midpoint of the demand curve, the price is =
$12.50 and the quantity is 25 pizzas per hour. If the 10/20
price rises from $10 to $15 a pizza, the quantity = 4.
­demanded decreases from 30 to 20 pizzas an hour and
the average price and average quantity are at the mid­ That is, the price elasticity of demand at an average
point of the demand curve. So price of $20 a pizza is 4.
At prices below the midpoint, the price elasticity of
10/25 demand is less than 1: Demand is inelastic. For
Price elasticity of demand = example, if the price rises from zero to $10 a pizza,
5/12.50
= 1. the quantity demanded decreases from 50 to 30 piz­
zas an hour. The average price is now $5 and the
average quantity is 40 pizzas an hour. So
That is, at the midpoint of a linear demand curve,
the price elasticity of demand is 1. 20/40
At prices above the midpoint, the price elasticity of Price elasticity of demand =
demand is greater than 1: Demand is elastic. To see 10/5
that demand is elastic, let’s calculate the elasticity = 1/4.
when the price rises from $15 to $25 a pizza. You can
see that quantity demanded decreases from 20 to zero That is, the price elasticity of demand at an average
pizzas an hour. The average price is $20 a pizza, and price of $5 a pizza is 1/4.

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 126 Chapter 4 Elasticity

Total Revenue and Elasticity

Figure 4.4  Elasticity and Total Revenue
The total revenue from the sale of a good equals the
price of the good multiplied by the quantity sold.

Price (dollars per pizza)

When a price changes, total revenue also changes.
But a cut in the price does not always decrease total 25.00
revenue. The change in total revenue depends on the Elastic
elasticity of demand in the following way: demand
20.00

■ If demand is elastic, a 1 percent price cut increases Unit

the quantity sold by more than 1 percent and total 15.00
elastic
revenue increase s. 12.50
■ If demand is inelastic, a 1 percent price cut 10.00 Inelastic
­increases the quantity sold by less than 1 percent demand
and total revenue decreases.
5.00
■ If demand is unit elastic, a 1 percent price cut
increases the quantity sold by 1 percent and total
revenue does not change.
0 25 50
Quantity (pizzas per hour)
In Fig. 4.4(a), over the price range $25 to $12.50 a
(a) Demand
pizza, demand is elastic. At a price of $12.50 a pizza,
demand is unit elastic. Over the price range from
$12.50 a pizza to zero, demand is inelastic.
Figure 4.4(b) shows total revenue. At a price of
Total revenue (dollars)

350.00 Maximum
$25, the quantity sold is zero, so total revenue total revenue
312.50
is zero. At a price of zero, the quantity demanded
is 50 pizzas an hour and total revenue is again zero.
A price cut in the elastic range brings an increase in 250.00
total revenue—the percentage increase in the quan­
tity demanded is greater than the percentage 200.00
decrease in price. A price cut in the inelastic range
brings a decrease in total revenue—the percentage 150.00
increase in the quantity demanded is less than the When demand When demand
percentage decrease in price. At unit elasticity, total 100.00 is elastic, a is inelastic, a
revenue is at a maximum. price cut price cut
increases decreases
Figure 4.4 shows how we can use this relation­ 50.00 total revenue total revenue
ship between elasticity and total revenue to esti­
mate elasticity using the total revenue test. The
total revenue test is a method of estimating the price 0 25 50
Quantity (pizzas per hour)
elasticity of demand by observing the change in
total revenue that results from a change in the (b) Total revenue
price, when all other influences on the quantity
sold remain the same. When demand is elastic, in the price range from $25 to
$12.50, a decrease in price (part a) brings an increase in
total revenue (part b). When demand is inelastic, in the
■ If a price cut increases total revenue, demand is
price range from $12.50 to zero, a decrease in price (part
elastic.
a) brings a decrease in total revenue (part b). When
■ If a price cut decreases total revenue, demand is
demand is unit elastic, at a price of $12.50 (part a), total
inelastic.
revenue is at a maximum (part b).
■ If a price cut leaves total revenue unchanged,
­demand is unit elastic. MyEconLab Animation

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 Price Elasticity of Demand      127

Economics in Action Price Elasticities of Demand for Food

Elastic and Inelastic Demand The price elasticity of demand for food in the United
States is estimated to be 0.12. This elasticity is an aver­
The real-world price elasticities of demand in the table age over all types of food. The demand for most food
range from 1.52 for metals, the item with the most items is inelastic, but there is a wide range of elasticities
elastic demand in the table, to 0.05 for oil, the item as the figure below shows for a range of fruits, vegeta­
with the most inelastic demand in the table. The bles, and meats.
­demand for food is also inelastic. The demand for grapes and the demand for beef
Oil and food, which have poor substitutes and inelas­ are elastic. The demand for oranges is unit elastic.
tic demand, might be classified as necessities. Furniture These food items, especially grapes and beef, have
and motor vehicles, which have good substitutes and many good substitutes. Florida winter tomatoes have
elastic demand, might be classified as luxuries. closer substitutes than tomatoes in general, so the
demand for the Florida winter variety is more elastic
Price Elasticities of Demand (less inelastic) than the ­demand for tomatoes.
Carrots and cabbage, on which we spend a very
Good or Ser vice Elasticity small proportion of income, have an almost zero elastic
demand.
Elastic Demand
Metals 1.52
Grapes
Electrical engineering products 1.39
Beef
Mechanical engineering products 1.30
Oranges
Furniture 1.26
Pork
Motor vehicles 1.14
Tomatoes
Instrument engineering products 1.10 (Florida winter)

Tomatoes
Transportation services 1.03 (all types)

Bananas

Inelastic Demand Celery

Gas, electricity, and water 0.92 Grapefruit

Chemicals 0.89 Chicken

Clothing 0.64 Onions

Banking and insurance services 0.56 Apples

Housing services 0.55 Lettuce Inelastic Elastic

Agricultural and fish products 0.42 Cabbage

Books, magazines, and newspapers 0.34 Carrots
Food 0.12
Cigarettes 0.11 0 0.5 1.0 1.5
Price elasticity of demand
Soft drinks 0.05
Oil 0.05 Price Elasticities of Demand for Food

Sources of data: Ahsan Mansur and John Whalley, “Numerical Specification of

Applied General Equilibrium Models: Estimation, Calibration, and Data,” in Sources of data: Kuo S. Huang, U.S. demand for food: A complete system of
Applied General Equilibrium Analysis, eds. Herbert E. Scarf and John B. Shoven price and income effects U.S. Dept. of Agriculture, Economic Research Service,
(New York: Cambridge University Press, 1984), 109, Henri Theil, Ching- Washington, DC, 1985; J. Scott Shonkwiler and Robert D. Emerson, “Imports
Fan Chung, and James L. Seale, Jr., Advances in Econometrics, Supplement I, and the Supply of Winter Tomatoes: An Application of Rational Expectations,”
1989, International Evidence on Consumption Patterns (Greenwich, Conn.: JAI American Journal of Agricultural Economics, Vol. 64, No. 4 (Nov., 1982),
Press Inc., 1989), and Emilio Pagoulatos and Robert Sorensen, “What Determines pp. 672–679; and Kuo S. Huang, “A Further Look at Flexibilities and Elasticities,”
the Elasticity of Industry Demand,” International Journal of Industrial American Journal of Agricultural Economics, Vol. 76, No. 2 (May, 1994),
Organization, 1986, and Geoffrey Heal, Columbia University, Web site. pp. 351–355.

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 128 Chapter 4 Elasticity

Economics in the News

The Elasticity of Demand for Peanut Butter ■ The data table says the price of peanut butter
increased by $0.80 with an average price of
Peanut Butter Prices to Rise 30 to 40 Percent
$2.40, so the price increased by 33.3 percent. The
Scott Karns, president and CEO of Karns Foods, said
quantity demanded decreased by 50 million tons with
“People are still going to need it for their family. It’s
an average quantity of 325 million tons, so the
still an extremely economical item.” Patty Nolan,
­quantity demanded decreased by 15.4 percent.
who is on a fixed income, said “I love peanut butter
The price elasticity of demand equals 15.4 percent
so I’m using a little less so I don’t go through it.”
­divided by 33.3 percent, which is 0.46.
Source: The Patriot-News, November 2, 2011

Price (dollars per pound)

The Data
Quantity Price
New
(millions of (dollars point
tons per year) per pound) 2.80
2011 350 2.00
2012 300 2.80
Elasticity = 0.46
The Questions
2.40
■ Does the news clip imply that the demand for peanut Pave = $2.40
butter is elastic or inelastic? Original
point
= $0.80
■ If the data are two points on the demand curve for
peanut butter, what is the price elasticity of demand?
2.00
The Answers D
Qave = 325
■ The two remarks in the news clip suggest that the
quantity of peanut butter demanded will decrease 0 300 325 350
Quantity (millions of tons per year)
when the price rises, but not by much. The
demand for peanut butter is inelastic. Calculating the Price Elasticity of Demand for Peanut Butter

MyEconLab More Economics in the News

Your Expenditure and Your Elasticity

Review Quiz
When the price of a good changes, the change in your
expenditure on the good depends on your elasticity of 1 Why do we need a units-free measure of the
demand. responsiveness of the quantity demanded of a
good or service to a change in its price?
■ If your demand for the good is elastic, a 1 percent
2 Define the price elasticity of demand and show
price cut increases the quantity you buy by more
how it is calculated.
than 1 percent and your expenditure on the item
increases. 3 What makes the demand for some goods elastic
■ If your demand for the good is inelastic, a 1 percent and the demand for other goods inelastic?
price cut increases the quantity you buy by less 4 Why is the demand for a luxury generally more
than 1 percent and your expenditure on the item elastic (or less inelastic) than the demand for a
decreases. necessity?
■ If your demand for the good is unit elastic, a 1 per­ 5 What is the total revenue test?
cent price cut increases the quantity you buy by 1 Work these questions in Study Plan 4.1 and get instant
percent and your expenditure on the item does not feedback. Do a Key Terms Quiz. MyEconLab
change.
So if you spend more on an item when its price You’ve now completed your study of the price
falls, your demand for that item is elastic; if you spend elasticity of demand. Two other elasticity concepts tell
the same amount, your demand is unit elastic; and if us about the effects of other influences on demand.
you spend less, your demand is inelastic. Let’s look at these other elasticities of demand.

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 More Elasticities of Demand      129

◆ More Elasticities of Demand Economics in Action

Suppose the economy is expanding and people are Necessities and Luxuries
enjoying rising incomes. You know that a change in
income changes demand. So this increased prosper­ The demand for a necessity such as food or clothing
ity brings an increase in the demand for most types is income inelastic, while the demand for a luxury
of goods and services. By how much will a rise in such as airline and foreign travel is income elastic.
­income increase the demand for pizza? This question But what is a necessity and what is a luxury depends
is answered by the income elasticity of demand. on the level of income. For people with a low in­
come, food and clothing can be luxuries. So the level
of income has a big effect on income elasticities of
Income Elasticity of Demand demand.
The income elasticity of demand is a measure of the The figure shows this effect on the income elastic­
­responsiveness of the demand for a good or ­service ity of demand for food in 10 countries. In countries
to a change in income, other things remaining with low incomes, such as Tanzania and India, the
the same. It tells us by how much a demand curve income elasticity of demand for food is high. In
shifts at a given price. countries with high incomes, such as Canada, the
The income elasticity of demand is calculated by income elasticity of demand for food is low. That is,
using the formula: as income increases, the income elasticity of demand
for food decreases. Low-income consumers spend a
Percentage change larger percentage of any increase in income on food
Income elasticity in quantity demanded than do high-income consumers.
= .
of demand Percentage change in income Income
Country (percentage of U.S. income)
Tanzania 3.3
Income elasticities of demand can be positive or
negative and they fall into three interesting ranges: India 5.2

Korea 20.4
■ Positive and greater than 1 (normal good, income Brazil 36.8
elastic)
Greece 41.3
■ Positive and less than 1 (normal good, income
Spain 55.9
inelastic)
Japan 61.6
■ Negative (inferior good)
France 81.1

Income Elastic Demand  Suppose that the price of Canada 99.2

pizza is constant and 9 pizzas an hour are bought. United States 100.0
Then incomes rise from $975 to $1,025 a week. No
0 0.2 0.4 0.6 0.8 1.0
other influence on buying plans changes and the
Income elasticity of demand
quantity of pizzas sold increases to 11 an hour.
The change in the quantity demanded is +2 pizzas. Income Elasticities in 10 Countries
The average quantity is 10 pizzas, so the quantity
demanded increases by 20 percent. The change in
income is +$50 and the average income is $1,000, so
Income Inelastic Demand  If the income elasticity of
incomes increase by 5 percent. The income elasticity
demand is positive but less than 1, demand is income
of demand for pizza is
inelastic. The percentage increase in the quantity
20, demanded is positive but less than the percentage
= 4. increase in income.
5,
Whether demand is income elastic or income
The demand for pizza is income elastic. The per­ inelastic has an important implication for the per­
centage increase in the quantity of pizza demanded centage of income spent on a good. If the demand for
exceeds the percentage increase in income. a good is income elastic, the percentage of income
spent on that good increases as income increases. And

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 130 Chapter 4 Elasticity

Cross Elasticity of Demand

Economics in Action The burger shop next to your pizzeria has just raised
Income Elastic and Inelastic Demand its price of a burger. You know that pizzas and burg­
ers are substitutes. You also know that when the price
The table shows some real-world income elasticites of of a substitute for pizza rises, the demand for pizza
demand and confirms that a necessity such as food or increases. But how big is the influence of the price of
clothing is income inelastic, while the demand for a a burger on the demand for pizza?
luxury such as airline travel is income elastic. You know, too, that pizza and soft drinks are com­
plements. And you know that if the price of a comple­
Some Real-World Income Elasticities of Demand ment of pizza rises, the demand for pizza decreases. So
you wonder, by how much will a rise in the price of a
Income Elastic Demand soft drink decrease the demand for your pizza?
Airline travel 5.82
To answer this question, you need to know about
the cross elasticity of demand for pizza. Let’s examine
Movies 3.41
this elasticity measure.
Foreign travel 3.08 We measure the influence of a change in the price
Electricity 1.94 of a substitute or complement by using the concept
Restaurant meals 1.61
of the cross elasticity of demand. The cross elasticity of
demand is a measure of the responsiveness of the
Local buses and trains 1.38 demand for a good to a change in the price of a sub­
Haircuts 1.36 stitute or complement, other things remaining the
Automobiles 1.07 same.
We calculate the cross elasticity of demand by using
the formula:
Income Inelastic Demand
Tobacco 0.86 Percentage change
Cross elasticity in quantity demanded
Alcoholic drinks 0.62 = .
Furniture 0.53
of demand Percentage change in price of
a substitute or complement
Clothing 0.51
Newspapers and magazines 0.38 The cross elasticity of demand can be positive or
Telephone 0.32 negative. If the cross elasticity of demand is positive,
Food 0.14
demand and the price of the other good change in
the same direction, so the two goods are substitutes. If
Sources of data: H.S. Houthakker and Lester D. Taylor, Consumer Demand in the the cross elasticity of demand is negative, demand and
United States (Cambridge, Mass.: Harvard University Press, 1970), and Henri
Theil, Ching-Fan Chung, and James L. Seale, Jr., Advances in Econometrics, the price of the other good change in opposite direc­
Supplement 1, 1989, International Evidence on Consumption Patterns tions, so the two goods are complements.
(Greenwich, Conn.: JAI Press, Inc., 1989).

Substitutes  Suppose that the price of pizza is con­

if the demand for a good is income inelastic, the per­ stant and people buy 9 pizzas an hour. Then the price
centage of income spent on that good decreases as of a burger rises from $1.50 to $2.50. No other influ­
income increases. ence on buying plans changes and the quantity of
pizzas bought increases to 11 an hour.
Inferior Goods  If the income elasticity of demand is The change in the quantity demanded at the cur­
negative, the good is an inferior good. The quantity rent price is +2 pizzas—the new quantity, 11 pizzas,
demanded of an inferior good and the amount spent minus the original quantity, 9 pizzas. The average
on it decrease when income increases. Goods in this quantity is 10 pizzas. So the quantity of pizzas
category include small motorcycles, potatoes, and ­demanded increases by 20 percent. That is,
rice. Low-income consumers buy these goods and
spend a large percentage of their incomes on them. ΔQ/Q ave * 100 = ( +2/10) * 100 = +20,.

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 More Elasticities of Demand      131

The change in the price of a burger, a substitute

for pizza, is +$1—the new price, $2.50, minus the Figure 4.5  Cross Elasticity of Demand
original price, $1.50. The average price is $2 a
burger. So the price of a burger rises by 50 percent.

Price of pizza
That is,
Price of a burger,
ΔP/Pave * 100 = (+ +1/+2) * 100 = +50,. a substitute, rises.
Positive cross elasticity
So the cross elasticity of demand for pizza with
respect to the price of a burger is
+20,
= 0.4.
+50,
D1
Figure 4.5 illustrates the cross elasticity of demand. Price of a soft drink,
Because pizza and burgers are substitutes, when the a complement, D0
rises. Negative
price of a burger rises, the demand for pizza increases. cross elasticity D2
The demand curve for pizza shifts rightward from D0
0
to D1. Because a rise in the price of a burger brings an Quantity of pizza

increase in the demand for pizza, the cross elasticity of

A burger is a substitute for pizza. When the price of a
demand for pizza with respect to the price of a burger
burger rises, the demand for pizza increases and the
is positive. Both the price and the quantity change in
demand curve for pizza shifts rightward from D0 to D1. The
the same direction.
cross elasticity of demand is positive.
A soft drink is a complement of pizza. When the price
Complements  Now suppose that the price of pizza is of a soft drink rises, the demand for pizza decreases and
constant and 11 pizzas an hour are bought. Then the the demand curve for pizza shifts leftward from D0 to D2.
price of a soft drink rises from $1.50 to $2.50. No The cross elasticity of demand is negative.
other influence on buying plans changes and the
quantity of pizzas bought falls to 9 an hour. MyEconLab Animation and Draw Graph

Economics in the News

More Peanut Butter Demand Elasticities ■ Is grape jelly a substitute for or a complement of pea­
nut butter? Is American cheese a substitute for or a
Peanut Butter Related Markets complement of peanut butter?
Professor Timothy Mathews teaches economics at
Kennesaw State University, Georgia, the nation’s number
one peanut-producing state. The data table below shows his The Answers
guesses about some demand elasticities for peanut butter. ■ The income elasticity of demand for peanut butter is
Source: Timothy Mathews negative, which means that peanut butter is an inferior
good. People buy less peanut butter as income rises.
The Data ■ The cross elasticity of demand of peanut butter
Income elasticity −0.31 with respect to the price of grape jelly is negative,
Cross elasticity peanut butter and grape jelly −0.27 which means that peanut butter and grape jelly are
Cross elasticity peanut butter and American cheese +0.18 complements.
■ The cross elasticity of demand of peanut butter
The Questions with respect to the price of American cheese is pos­
■ What do the data provided tell us about the demand itive, which means that peanut butter and
for peanut butter? Is it a normal good? American cheese are substitutes.

MyEconLab More Economics in the News

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 132 Chapter 4 Elasticity

The change in the quantity demanded is the

opposite of what we’ve just calculated: The quantity
◆ Elasticity of Supply
of pizzas demanded decreases by 20 percent (-20%). You know that when demand increases, the equilib­
The change in the price of a soft drink, a rise of rium price rises and the equilibrium quantity
$1 from $1.50 to $2.50, is the same as the change increases. But does the price rise by a large amount
in the price of a burger that we’ve just calculated. and the quantity increase by a little? Or does the
That is, the price rises by 50 percent (+50%). price barely rise and the quantity increase by a large
So the cross elasticity of demand for pizza with amount?
respect to the price of a soft drink is The answer depends on the responsiveness of the
quantity supplied to a change in the price. If the
-20, quantity supplied is not very responsive to price, then
= -0.4.
+50, an increase in demand brings a large rise in the price
and a small increase in the equilibrium quantity. If
Because pizza and soft drinks are complements, the quantity supplied is highly responsive to price,
when the price of a soft drink rises, the demand for then an increase in demand brings a small rise in the
pizza decreases. price and a large increase in the equilibrium quantity.
In Fig. 4.5, when the price of soft drinks rises the The problems that arise from using the slope of
demand curve for pizza shifts leftward from D0 to D2. the supply curve to indicate responsiveness are the
Because a rise in the price of a soft drink brings a same as those we considered when discussing the
decrease in the demand for pizza, the cross elasticity of responsiveness of the quantity demanded, so we use
demand for pizza with respect to the price of a soft a units-free measure—the elasticity of supply.
drink is negative. The price and quantity change in
opposite directions.
The magnitude of the cross elasticity of demand Calculating the Elasticity of Supply
determines how far the demand curve shifts. The
larger the cross elasticity (absolute value), the greater The elasticity of supply measures the responsiveness of
is the change in demand and the larger is the shift in the quantity supplied to a change in the price of a
the demand curve. good when all other influences on selling plans
If two items are close substitutes, such as two remain the same. It is calculated by using the formula:
brands of spring water, the cross elasticity is large. If
two items are close complements, such as movies and Percentage change in
popcorn, the cross elasticity is large. quantity supplied
If two items are somewhat unrelated to each other, Elasticity = .
of supply Percentage change in price
such as newspapers and orange juice, the cross elastic­
ity is small—perhaps even zero.
We use the same method that you learned when you
studied the elasticity of demand. (Refer back to p. 122
to check this method.)
Review Quiz
1 What does the income elasticity of demand
Elastic and Inelastic Supply  If the elasticity of supply
measure?
is greater than 1, we say that supply is elastic; and if
2 What does the sign (positive/negative) of the the elasticity of supply is less than 1, we say that sup­
income elasticity tell us about a good? ply is inelastic.
3 What does the cross elasticity of demand measure? Suppose that when the price rises from $20 to
4 What does the sign (positive/negative) of the $21, the quantity supplied increases from 10 to 20
cross elasticity of demand tell us about the rela­ pizzas per hour. The price rise is $1 and the average
tionship between two goods? price is $20.50, so the price rises by 4.9 percent of
Work these questions in Study Plan 4.2 and get instant the average price. The quantity increases from 10 to
feedback. Do a Key Terms Quiz. 20 pizzas an hour, so the increase is 10 pizzas, the
MyEconLab average quantity is 15 pizzas, and the quantity

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 Elasticity of Supply      133

i­ncreases by 67 percent. The elasticity of supply is The Factors That Influence the
equal to 67 percent divided by 4.9 percent, which Elasticity of Supply
equals 13.67. Because the elasticity of supply exceeds
1 (in this case by a lot), supply is elastic. The elasticity of supply of a good depends on
In contrast, suppose that when the price rises from ■ Resource substitution possibilities
$20 to $30, the quantity of pizza supplied increases ■ Time frame for the supply decision
from 10 to 13 per hour. The price rise is $10 and the
average price is $25, so the price rises by 40 percent
of the average price. The quantity increases from 10 Resource Substitution Possibilities  Some goods and
to 13 pizzas an hour, so the increase is 3 pizzas, the services can be produced only by using unique or
average quantity is 11.5 pizzas an hour, and the rare productive resources. These items have a low,
quantity increases by 26 percent. The elasticity of perhaps even a zero, elasticity of supply. Other
supply is equal to 26 percent divided by 40 percent, goods and services can be produced by using com­
which equals 0.65. Now, because the elasticity of monly available resources that could be allocated to
supply is less than 1, supply is inelastic. a wide variety of alternative tasks. Such items have a
Figure 4.6 shows the range of elasticities of supply. high elasticity of supply.
If the quantity supplied is fixed regardless of the A van Gogh painting is an example of a good with
price, the supply curve is vertical and the elasticity of a vertical supply curve and a zero elasticity of supply.
supply is zero. Supply is perfectly inelastic. This case At the other extreme, wheat can be grown on land
is shown in Fig. 4.6(a). A special intermediate case that is almost equally good for growing corn, so it is
occurs when the percentage change in price equals just as easy to grow wheat as corn. The opportunity
the percentage change in quantity. Supply is then cost of wheat in terms of forgone corn is almost con­
unit elastic. This case is shown in Fig. 4.6(b). No stant. As a result, the supply curve of wheat is almost
matter how steep the supply curve is, if it is linear horizontal and its elasticity of supply is very large.
and passes through the origin, supply is unit elastic. Similarly, when a good is produced in many different
If there is a price at which sellers are willing to offer countries (for example, sugar and beef ), the supply of
any quantity for sale, the supply curve is horizontal the good is highly elastic.
and the elasticity of supply is infinite. Supply is per­ The supply of most goods and services lies
fectly elastic. This case is shown in Fig. 4.6(c). between these two extremes. The quantity produced

Figure 4.6  Inelastic and Elastic Supply

S1
Price

Price

Price

S 2A

Elasticity of
supply =
Elasticity of
supply = 0 Elasticity of
S3
supply = 1
S 2B

0 Quantity 0 Quantity 0 Quantity

(a) Perfectly inelastic supply (b) Unit elastic supply (c) Perfectly elastic supply

Each supply illustrated here has a constant elasticity. The supply. All linear supply curves that pass through the origin
supply curve in part (a) illustrates the supply of a good that illustrate supplies that are unit elastic. The supply curve in
has a zero elasticity of supply. Each supply curve in part (b) part (c) illustrates the supply of a good with an infinite elas­
illustrates the supply of a good with a unit elasticity of ticity of supply.

MyEconLab Animation

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 134 Chapter 4 Elasticity

can be increased but only by incurring a higher cost. For the orange grower, if the price of oranges falls,
If a higher price is offered, the quantity supplied some pickers can be laid off and oranges left on the
increases. Such goods and services have an elasticity trees to rot. Or if the price of oranges rises, the
of supply between zero and infinity. grower can use more fertilizer and improved irriga­
tion to increase the yield of the existing trees.
Time Frame for the Supply Decision  To study the But an orange grower can’t change the number of
influence of the amount of time elapsed since a price trees producing oranges in the short run.
change, we distinguish three time frames of supply: Long-Run Supply  The response of the quantity supplied
to a price change after all the technologically possible
■ Momentary supply
ways of adjusting supply have been exploited is deter­
■ Short-run supply mined by long-run supply. For most goods and services,
■ Long-run supply long-run supply is elastic and perhaps perfectly elastic.
For the orange grower, the long run is the time it
Momentary Supply  When the price of a good changes, takes new tree plantings to grow to full maturity—
the immediate response of the quantity supplied is about 15 years. In some cases, the long-run ­adjustment
determined by the momentary supply of that good. occurs only after a completely new production plant
Some goods, such as fruits and vegetables, have a has been built and workers have been trained to oper­
perfectly inelastic momentary supply—a vertical ate it—typically a process that might take several years.
supply curve. The quantities supplied depend on
crop-planting decisions made earlier. In the case of
oranges, for example, planting decisions have to be
made many years in advance of the crop being Review Quiz
available. Momentary supply is perfectly inelastic
because, on a given day, no matter what the price of 1 Why do we need a units-free measure of the
oranges, producers cannot change their output. ­responsiveness of the quantity supplied of a
They have picked, packed, and shipped their crop good or service to a change in its price?
to market, and the quantity available for that day is 2 Define the elasticity of supply and show how it
fixed. is calculated.
In contrast, some goods have a perfectly elastic 3 What are the main influences on the elasticity
momentary supply. Long-distance phone calls are an of supply that make the supply of some goods
example. When many people simultaneously make a elastic and the supply of other goods inelastic?
call, there is a big surge in the demand for telephone 4 Provide examples of goods or services whose elas­
cables, computer switching, and satellite time. The ticities of supply are (a) zero, (b) greater than zero
quantity supplied increases, but the price remains but less than infinity, and (c) infinity.
constant. Long-distance carriers monitor fluctuations
5 How does the time frame over which a ­supply
in demand and reroute calls to ensure that the quan­
decision is made influence the elasticity of
tity supplied equals the quantity demanded without
­supply? Explain your answer.
changing the price.
Work these questions in Study Plan 4.3 and get instant
Short-Run Supply  The response of the quantity sup­- feedback. Do a Key Terms Quiz. MyEconLab
plied to a price change when only some of the possi­
ble adjustments to production can be made is
determined by short-run supply. Most goods have an
inelastic short-run supply. To increase output in the
short run, firms must work their labor force overtime ◆  You have now learned about the elasticities of
and perhaps hire additional workers. To decrease demand and supply. Table 4.1 summarizes all the elastic­
their output in the short run, firms either lay off ities that you’ve met in this chapter. In the next chapter,
workers or reduce their hours of work. With the we study the efficiency of competitive markets. But first
­passage of time, firms can make more adjustments, study Economics in the News on pp. 136–137, which
perhaps training additional workers or buying puts the elasticity of demand to work and looks at the
­additional tools and other equipment. market for coffee.

M04_PARK4502_12_GE_C04.indd 134 18/08/15 10:56 AM

 Elasticity of Supply      135

Table 4.1  A Compact Glossary of Elasticities

Price Elasticities of Demand
A relationship is described as When its magnitude is Which means that
Perfectly elastic Infinity The smallest possible increase in price causes an infinitely
large decrease in the quantity demanded*
Elastic Less than infinity but The percentage decrease in the quantity demanded
greater than 1 exceeds the percentage increase in price
Unit elastic 1 The percentage decrease in the quantity demanded
equals the percentage increase in price
Inelastic Less than 1 but The percentage decrease in the quantity demanded
greater than zero is less than the percentage increase in price
Perfectly inelastic Zero The quantity demanded is the same at all prices

Cross Elasticities of Demand

A relationship is described as When its value is Which means that
Close substitutes Large The smallest possible increase in the price of one good
causes an infinitely large increase in the quantity
demanded* of the other good
Substitutes Positive If the price of one good increases, the quantity
demanded of the other good also increases
Unrelated goods Zero If the price of one good increases, the quantity
demanded of the other good remains the same
Complements Negative If the price of one good increases, the quantity
demanded of the other good decreases

Income Elasticities of Demand

A relationship is described as When its value is Which means that
Income elastic Greater than 1 The percentage increase in the quantity demanded is
(normal good) greater than the percentage increase in income*
Income inelastic Less than 1 but The percentage increase in the quantity demanded is
(normal good) greater than zero greater than zero but less than the percentage increase in
income
Negative Less than zero When income increases, quantity demanded
(inferior good) decreases

Elasticities of Supply
A relationship is described as When its magnitude is Which means that
Perfectly elastic Infinity The smallest possible increase in price causes an
infinitely large increase in the quantity supplied*
Elastic Less than infinity but The percentage increase in the quantity supplied
greater than 1 exceeds the percentage increase in the price
Unit elastic 1 The percentage increase in the quantity supplied equals
the percentage increase in the price
Inelastic Greater than zero but The percentage increase in the quantity supplied is
less than 1 less than the percentage increase in the price
Perfectly inelastic Zero The quantity supplied is the same at all prices

*In each description, the directions of change may be reversed. For example, in the case of a perfectly elastic demand, the smallest possible decrease in price
causes an infinitely large increase in the quantity demanded.

M04_PARK4502_12_GE_C04.indd 135 18/08/15 10:56 AM

 Economics in the News

The Elasticity of Demand

for Coffee
Drop in Global Coffee Prices Shrinks Farmers’ Revenue
Daily Monitor
November 6, 2013

Global coffee prices have continued on a downward trend, casting a gloomy picture on … 
farmers’ income.
Latest records from the International Coffee Organization (ICO) show the drop has con­
tinued even as the new coffee calendar begins.
By close of October, ICO [average price] dropped to 100.38 cents, down from the 111.82
cents per pound in September. …
In an interview with the Daily Monitor, Mr. David Barry, the managing director
of ­Kyagalanyi Coffee Ltd., Uganda’s leading coffee exporting
company, said: “We may not know what’s ahead of
us but trends show a further fall in prices and everyone Essence of the Story
has to brave this.”
■ Global coffee prices fell from 111.82 cents
The drop in price has been attributed to increased per pound in September 2013 to 100.38
­production, with the biggest producers being Brazil and cents per pound in November 2013.
Vietnam. … [Their] combined production reached ■ The fall in price was the result of increased
90 million bags, with the latter posting 60 million bags production.
and the former 30 million. ■ Output in Brazil, the world’s largest producer,
was 60 million bags, and in Vietnam, the
Crop year 2012/13 has now closed in all exporting second-largest producer, it was 30 million
countries and according to available information, total bags.
production is estimated at 145.2 million bags. This is ■ For the crop year 2012/13, total production
12.8 million bags more than 2011/12, representing a 9.6 was estimated at 145.2 million bags.
percent increase. … ■ Production in 2012/13 was 12.8 million bags
more than 2011/12, a 9.6 percent increase.
Used with permission of the Daily Monitor. Copyright © 2013.
All rights reserved.

MyEconLab More Economics in the News

136

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 Economic Analysis
■ The table below summarizes data provided by the 180
­International Coffee Organization, which supplements ... and climbed
and updates some of the information in this news 160 steeply in 2014

Price (U.S. cents per pound)

Price fell
article.
through
Summary of Coffee Data 140 2013 ...

Quantity produced Price

Year (millions of bags) (U.S. cents per pound) 120

2012 134 135 100

2013 145 100
80
■ Figure 1 provides yet more data and shows that after 01/13 03/13 05/13 07/13 09/13 11/13 01/14 03/14
falling through 2013, the price of coffee climbed steeply Month/year
in 2014. Figure 1 The Coffee-Price Roller Coaster

■ The price of coffee fluctuates because the supply of

coffee fluctuates. And the price flucutates by much S12 S13
Price (U.S. cents per pound)
more than the quantity of coffee produced because the
demand for coffee is inelastic. 135

■ The news headline provides the first clue that demand 120
is inelastic: When the price falls, revenue shrinks. This Bumper crop
information enables us to use the total revenue test, “If increases supply
100
a price cut decreases total revenue, then demand is
inelastic.”
80
■ We can estimate the price elasticity of demand for cof­ D
fee, assuming that demand didn’t change, by using the
events in the market in 2012 and 2013. 0 134 145 160
Quantity (millions of bags per year)
■ Figure 2 illustrates the global market for coffee in these
two years. The demand curve for coffee is D and in Figure 2 The Market for Coffee: 2012 and 2013
2012, the supply curve of coffee was S12. The equilibri­
um price was 135 cents per pound, and the equilibrium
Price (U.S. cents per pound)

Price elasticity of
quantity was 134 million bags. Original
demand = 0.26
135 point
■ In 2013, supply increased to S13, the price fell to 100 Pave
cents per pound, and the quantity increased to 145
117
­million bags. = 35¢
New
■ Figure 3 focuses on the demand curve and summarizes 100 point
the elasticity calculation. The price fell by 35 cents,
which is 30 percent of the average price of 117 cents.
80
The quantity demanded increased by 11 million bags, D
Qave
which is 7.9 percent of the average quantity.
■ The price elasticity of demand is 7.9 percent/30 percent, 0 134 139.5 145 160
Quantity (millions of bags per year)
which equals 0.26. A 1 percent fall in price brings a
0.26 percent increase in the quantity demanded. And a Figure 3 The Price Elasticity of Demand for Coffee
1 percent increase in the quantity brings a fall in price
equal to 1/0.26, or almost 4 percent.
■ When demand is inelastic, a small percentage change
in the supply brings a large percentage change in the
price.

137

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 138 Chapter 4 Elasticity

Summary

Key Points income spent on the good decreases as income

increases.
Price Elasticity of Demand (pp. 122–128) ■ Cross elasticity of demand measures the respon­
■ Elasticity is a measure of the responsiveness of the siveness of the demand for one good to a change
quantity demanded of a good to a change in its in the price of a substitute or a complement, other
price, other things remaining the same. things remaining the same.
■ Price elasticity of demand equals the percentage ■ The cross elasticity of demand with respect to the
change in the quantity demanded divided by the price of a substitute is positive. The cross elasticity
percentage change in the price. of demand with respect to the price of a comple­
■ The larger the magnitude of the price elasticity of ment is negative.
demand, the greater is the responsiveness of the Working Problems 6 to 8 will give you a better under-
quantity demanded to a given price change. standing of cross and income elasticities of demand.
■ If demand is elastic, a cut in price leads to an
increase in total revenue. If demand is unit elastic,
a cut in price leaves total revenue unchanged. And Elasticity of Supply (pp. 132–134)
if demand is inelastic, a cut in price leads to a ■ Elasticity of supply measures the responsiveness of
decrease in total revenue. the quantity supplied of a good to a change in its
■ Price elasticity of demand depends on how easily price, other things remaining the same.
one good serves as a substitute for another, the ■ The elasticity of supply is usually positive and
proportion of income spent on the good, and the ranges between zero (vertical supply curve) and
length of time elapsed since the price change. infinity (horizontal supply curve).
■ Supply decisions have three time frames: momen­
Working Problems 1 to 5 will give you a better under- tary, short run, and long run.
standing of the price elasticity of demand.
■ Momentary supply refers to the response of the
More Elasticities of Demand (pp. 129–132) quantity supplied to a price change at the instant
that the price changes.
■ Income elasticity of demand measures the respon­
siveness of demand to a change in income, other
■ Short-run supply refers to the response of the
things remaining the same. For a normal good, the quantity supplied to a price change after some of
income elasticity of demand is positive. For an the technologically feasible adjustments in produc­
inferior good, the income elasticity of demand is tion have been made.
negative. ■ Long-run supply refers to the response of the
■ When the income elasticity of demand is greater quantity supplied to a price change when all the
than 1 (income elastic), the percentage of income technologically feasible adjustments in production
spent on the good increases as income increases. have been made.
■ When the income elasticity of demand is less than Working Problem 9 will give you a better understanding of
1 (income inelastic or inferior), the percentage of the elasticity of supply.

Key Terms MyEconLab Key Terms Quiz

Cross elasticity of demand, 130 Inelastic demand, 123 Total revenue, 126
Elastic demand, 124 Perfectly elastic demand, 123 Total revenue test, 126
Elasticity of supply, 132 Perfectly inelastic demand, 123 Unit elastic demand, 123
Income elasticity of demand, 129 Price elasticity of demand, 122

M04_PARK4502_12_GE_C04.indd 138 18/08/15 10:56 AM

 Worked Problem      139

Worked Problem
MyEconLab  You can work this problem in Chapter 4 Study Plan.

A rise in the price of a smoothie from $2 to $3 re­ Key Point: When the percentage change in the quan­
sults in a fall in the quantity of smoothies demanded tity demanded is less than the percentage change in
from 220 million to 180 million a day and at today’s the price, demand is inelastic and the price elasticity
price of a muffin, $1.50, the quantity of muffins de­ of demand is less than 1.
manded increases from 80 million to 100 million a day. 4. To calculate the cross elasticity of demand for
muffins with respect to the price of a smoothie,
Questions
divide the percentage change in quantity of muf­
1. Calculate the percentage change in the price of a fins demanded by the percentage change in the
smoothie and the percentage change in the quan­ price of a smoothie.
tity demanded of smoothies. When the price of a smoothie rises by 40 per­
2. Calculate the price elasticity of demand for cent, the quantity of muffins demanded increases
smoothies. from 80 million to 100 million, a change of 20
3. Is the demand for smoothies elastic or inelastic? million.
4. Calculate the cross elasticity of demand for muf­ The average quantity of muffins is 90 million, so
fins with respect to the price of a smoothie. the percentage change in the quantity of muffins
is (20 million/90 million) * 100, which equals
Solutions 22.2 percent.
1. The price of a smoothie rises by $1 and the The cross elasticity of the demand for muffins
quantity demanded falls by 40 million a day. with respect to the price of a smoothie equals
To calculate the percentage changes in the price 22.2 percent/40 percent, which equals 0.55.
and quantity demanded, use the average price The cross elasticity of demand for muffins with
and average quantity. The figure illustrates the respect to the price of a smoothie is positive,
calculations. which means that muffins and smoothies are
The average price of a smoothie is $2.50, so the substitutes—just as you thought!
percentage change in the price was ($1/$2.50) * Key Point: The cross elasticity of demand is positive
100, or 40 percent. for substitutes and negative for complements.
The average quantity of smoothies is 200 mil­
lion, so the percentage change in the quantity Key Figure
demanded was (40 million/200 million) * 100,
or 20 percent.
Price (dollars per smoothie)

Key Point: When working with elasticity, the percent­ New

age change in the price and quantity is the percentage point
3.00
of the average price and average quantity.
2. The price elasticity of demand is the ratio of the Elasticity = 0.5
percentage change in the quantity to the percent­ Pave
age change in price. 2.50
= $1
To calculate the price elasticity of demand for Original
smoothies, divide the percentage change in quan­ point
tity by the percentage change in the price. The
2.00
ratio of two percentage changes has no units.
D
Key Point: The price elasticity calculated is the price Qave
elasticity of demand at the price midway between the 0 180 200 220
original and the new prices. That is, it calculates the Quantity (millions of smoothies per day)
elasticity at the average price.
3. The price elasticity of demand for smoothies is MyEconLab Interactive Animation
less than 1, so the demand is inelastic.

M04_PARK4502_12_GE_C04.indd 139 18/08/15 10:56 AM

 140 Chapter 4 Elasticity

Study Plan Problems and Applications

MyEconLab  You can work Problems 1 to 9 in Chapter 4 Study Plan and get instant feedback.

Price Elasticity of Demand (Study Plan 4.1) percent, other things remaining the same.
1. Rain spoils the strawberry crop, the price rises a. What was Universal Music’s estimate of the
from $4 to $6 a box, and the quantity demanded price elasticity of demand for CDs?
decreases from 1,000 to 600 boxes a week. b. If you were making the pricing decision at
a. Calculate the price elasticity of demand over Universal Music, what would be your pricing
this price range. decision? Explain your decision.
b. Describe the demand for strawberries.
More Elasticities of Demand (Study Plan 4.2)
2. If the quantity of dental services demanded
­increases by 10 percent when the price of dental 6. When Judy’s income increased from $130 to
services falls by 10 percent, is the demand for $170 a week, she increased her demand for con­
dental services inelastic, elastic, or unit elastic? cert tickets by 15 percent and decreased her
3. The demand schedule for hotel rooms is demand for bus rides by 10 percent. Calculate
Judy’s income elasticity of demand for (a) con­
Price Quantity demanded
(dollars per room (millions of rooms
cert tickets and (b) bus rides.
per night) per night) 7. If a 12 percent rise in the price of orange juice
200 100 decreases the quantity of orange juice demanded
250  80 by 22 percent and increases the quantity of apple
400  50 juice demanded by 14 percent, calculate the
500  40 a. Price elasticity of demand for orange juice.
800  25 b. Cross elasticity of demand for apple juice with
a. What happens to total revenue when the price respect to the price of orange juice.
falls from $400 to $250 a room per night and 8. If a rise in the price of sushi from 98¢ to $1.02
from $250 to $200 a room per night? a piece decreases the quantity of soy sauce de­
b. Is the demand for hotel rooms elastic, inelastic, manded from 101 units to 99 units an hour and
or unit elastic? decreases the quantity of sushi demanded by 1
percent an hour, calculate the:
4. The figure shows the demand for pens.
a. Price elasticity of demand for sushi.
Price (dollars per pen)

12
b. Cross elasticity of demand for soy sauce with
respect to the price of sushi.
10

8
Elasticity of Supply (Study Plan 4.3)
9. The table sets out the supply schedule of jeans.
6
Price Quantity supplied
4 (dollars per pair) (millions of pairs per year)

2 120 24
D 125 28
0 20 40 60 80 100 120 130 32
Pens per day
135 36
Calculate the elasticity of demand when the
price rises from $4 to $6 a pen. Over what price a. Calculate the elasticity of supply when the
range is the demand for pens elastic? price rises from $125 to $135 a pair.
5. In 2003, when music downloading first took off, b. Calculate the elasticity of supply when the av­
Universal Music slashed the average price of a erage price is $125 a pair.
CD from $21 to $15. The company expected the c. Is the supply of jeans elastic, inelastic, or unit
price cut to boost the quantity of CDs sold by 30 elastic?

M04_PARK4502_12_GE_C04.indd 140 18/08/15 10:56 AM

 Additional Problems and Applications      141

Additional Problems and Applications

MyEconLab  You can work these problems in MyEconLab if assigned by your instructor.

Price Elasticity of Demand 15. Your price elasticity of demand for bananas is 4.
10. With higher fuel costs, airlines raised their aver­ If the price of bananas rises by 5 percent, what is
age fare from 75¢ to $1.25 per passenger mile a. The percentage change in the quantity of ba­
and the number of passenger miles decreased nanas you buy?
from 2.5 million a day to 1.5 million a day. b. The change in your expenditure on bananas?
a. What is the price elasticity of demand for air
travel over this price range? More Elasticities of Demand
b. Describe the demand for air travel. 16. Over 15 Million Households Plan To Ration
Energy Use This Winter to Cope With Soaring Bills
11. The figure shows the demand for DVD rentals.
The cost of energy is rising and British consum­
ers are left to cope with a harsh winter. Seeing
Price (dollars per DVD)

6 their energy bills rise, millions of households are

5
planning to cut back as much as they can on their
energy use despite the cold temperature, putting
4 their health at risk. Many bill payers will cope by
spending less on food so that they can afford to
3
keep their homes warm. Household disposable
2 income has been substantially affected by ris­
ing energy costs and prices are expected to keep
1 increasing. Some estimate that the average UK
D home will spend £53 more on energy this year.
0 25 50 75 100 125 150
DVD rentals per day
Source: This is Money, November 6, 2014

a. Calculate the elasticity of demand when the a. List and explain the elasticities of demand that
price of a DVD rental rises from $3 to $5. are implicitly referred to in the news clip.
b. At what price is the elasticity of demand for b. Why, according to the news clip, is the de­
DVD rentals equal to 1? mand for energy inelastic?
Use this information to work Problems 17 and 18.
Use the following table to work Problems 12 to 14.
Recession Has Led To Spending On Food Falling By
The demand schedule for computer chips is 8.5%, Say Researchers
Price Quantity demanded Families in Britain, especially the ones with children,
(dollars per chip) (millions of chips per year)
have altered their eating habits in the face of reces­
200 50 sion. Less is spent on fruit and vegetables and more
250 45 on processed foods lacking in nutrition.
300 40 Source: The Guardian, November 4, 2013
350 35
17. Given the prices, is the income elasticity of de­
400 30
mand for fruit and vegetables positive or nega­
12. a. What happens to total revenue if the price tive? Are fruit and vegetables a normal good or
falls from $400 to $350 a chip and from $350 an inferior good? Are processed foods a normal
to $300 a chip? good or inferior good?
b. At what price is total revenue at a maximum? 18. Are fruits and vegetables and processed foods sub­
13. At an average price of $350, is the demand for stitutes? Explain.
chips elastic, inelastic, or unit elastic? Use the 19. When Alex’s income was $3,000, he bought
total revenue test to answer this question. 4 bagels and 12 donuts a month. Now his income
14. At $250 a chip, is the demand for chips elastic or is $5,000 and he buys 8 bagels and 6 donuts a
inelastic? Use the total revenue test to answer this month. Calculate Alex’s income elasticity of de­
question. mand for (a) bagels and (b) donuts.

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 142 Chapter 4 Elasticity

20. Pampered Pets UK! 24. Weak Coal Prices Hit China’s Third-Largest
The economy has slowed down again but Coal Miner
Britain’s animal lovers have not stopped them­ The chairman of Yanzhou Coal Mining reported
selves from spending on gourmet pet food, that the recession had decreased the demand for
spoiling their pets even though their budgets coal, with its sales falling by 11.9 percent to 7.92
are tight. In fact, more than a third of pet own­ million tons from 8.99 million tons a year ­earlier,
ers claim that they would cut back on their own despite a 10.6 percent cut in the price.
food purchases before that of their pets. Source: Dow Jones, April 27, 2009
Source: The Independent, April 14, 2015
Calculate the price elasticity of supply of coal. Is
a. What does this news clip imply about the the supply of coal elastic or inelastic?
income elasticity of demand for gourmet pet
food? Economics in the News
b. Would the income elasticity of demand be 25. After you have studied Economics in the News
greater or less than 1? Explain. on pp. 136–137, answer the following questions.
a. Looking at Fig. 1 on p. 137, explain what must
21. If a 5 percent fall in the price of chocolate sauce
have happened in 2014 to the supply of coffee.
increases the quantity demanded of chocolate
sauce by 10 percent and increases the quantity of b. Given the information in Fig. 1 and the esti­
ice cream demanded by 15 percent, calculate the mated elasticity of demand for coffee, by what
a. Price elasticity of demand for chocolate sauce. percentage did the quantity of coffee change in
2014 and in which direction?
b. Cross elasticity of demand for ice cream with
respect to the price of chocolate sauce. c. The news article says that farmers’ revenue
shrank as the price of coffee fell. Explain why
22. To Love, Honor, and Save Money this fact tells us that the demand for coffee is
In a survey of caterers and event planners, nearly inelastic.
half of them said that they were seeing declines d. How does the total revenue test work for a rise
in wedding spending in response to the eco­ in the price? What do you predict happened to
nomic slowdown; 12% even reported wedding total revenue in 2014? Why?
cancellations because of financial concerns.
e. Coffee isn’t just coffee. It comes in different
Source: Time, June 2, 2008
varieties, the main two being Arabica and
a. Based upon this news clip, are wedding events Robusta. Would you expect the elasticity of de­
a normal good or an inferior good? Explain. mand for Arabica to be the same as the elasticity
b. Are wedding events more a necessity or a lux­ of demand for coffee? Explain why or why not.
ury? Would the income elasticity of demand 26. Mobile Merger Set for Poor Reception from
be greater than 1, less than 1, or equal to 1? Users If Prices Rise
Explain. Hutchinson Whampoa, owner of Three, UK’s
fastest growing mobile network, has started ex­
Elasticity of Supply clusive talks to buy Telefónica’s O2 for £10.25
23. The table sets out the supply schedule of long- billion. This has caused price-rise concerns
distance phone calls. among British phone users.
Price Quantity supplied Source: The Financial Times, January 23, 2015
(cents per minute) (millions of minutes per day)
a. If the prices of telecom services rise because of
10 200 the deal, how will this influence the supply of
20 400 telecom services?
30 600 b. Given your answer to part (a), explain why
40 800 Hutchison Whampoa can afford to raise mo­
Calculate the elasticity of supply when bile tariffs?
a. The price falls from 40¢ to 30¢ a minute. c. What can you say about the price elasticity
b. The average price is 20¢ a minute. of demand for services in the UK telecoms
market with respect to the deal between
Hutchinson Whampoa and Telefónica?

M04_PARK4502_12_GE_C04.indd 142 18/08/15 10:56 AM